The widening gap between rich and poor that has disfigured and weakened our society over recent decades is widely deplored, but there is surprisingly little understanding of how that growing inequality has been brought about.

For most people, it simply reflects the natural order; the rich have each individually taken their chance, as anyone would, to inflate the rewards of various kinds – profits, salaries, bonuses, share issues, golden handshakes – that they are able to command. Their riches are regarded, as a general proposition, as a reward for their success.

But those huge advantages – on a scale so outrageous that it is hard to comprehend – have not so much come about by good fortune or because the rich have individually discovered the path to great wealth through their own hard work, cleverness or luck, but because the whole operation of the modern economy has been deliberately geared to favour them as a class. The statistics are incontrovertible; the rich have claimed virtually the whole of the additional wealth that has been produced over the past thirty years. They have been able to do so because they were already rich. It is beyond doubt that the best way to become seriously wealthy is to start off wealthy in the first place.

The rich have, in other words, been the beneficiaries of a complex and comprehensive interlocking set of policies that have been deliberately put in place to ensure that their wealth just keeps on growing. Those policies have formed the bedrock of the neo-liberal consensus adhered to by governments in most western countries over the last three decades. That consensus has been peddled as benefiting us all, but it has been in reality a huge machine designed to increase the advantages that the rich enjoy over the rest of us.

The merits of globalisation, the virtues of monetarism, the over-riding importance of restraining inflation while taking a relaxed attitude to unemployment, the primacy of banks in making decisions about our economy, the superiority – indeed, infallibility – of the market as opposed to the supposedly stultifying effect of government intervention, austerity as the correct response to recession, have all been articles of faith for governments of various political colours; indeed, in the British case, New Labour was among the most enthusiastic proponents of all of these nostrums.

How have these policies – supported on the face of it because they are supposed to produce a more efficient and productive economy – actually contributed to widening inequality? Let us take, for example, the widely accepted view that the only goal of macro-economic policy should be the control of inflation, and that that is best done by restraining the growth in the money supply – a task that should be entrusted to unelected and unaccountable bankers and is therefore immune from scrutiny by democratic agencies.

But monetarism takes an essentially static view of the economy’s capacity to grow and create new jobs. The priority given to inflation ensures that as soon as there is any sign of growth, the brakes – in the form of higher interest rates – are slammed on, with the intention that that the value of existing assets should be protected; but, at the same time, a high unemployment rate is also guaranteed and becomes endemic. Continuing high unemployment, of course, suits the interests of employers, by holding down any threatened growth in real wages – and unemployment remains the single most important factor in creating avoidable poverty. Monetarism, in other words, is a mechanism for protecting the interests of the rich but sacrificing those of the majority.

The same inbuilt bias in favour of the rich can be seen in many other aspects of policy. The propensity to raise interest rates as the principal instrument of what remains of macro-economic policy has the effect of favouring the holders of assets – those who are already wealthy and who operate in the financial economy, at the expense of those wishing to borrow for productive investment – those who live and work in the real economy and are the creators of new wealth.

And the primacy accorded to the banks in deciding economic policy places the alcoholic in charge of the brewery. The astonishing monopoly allowed to the commercial banks – the power to create money out of nothing by the stroke of a computer key and then to use the proceeds for the purposes that they alone decide – delivers to them immensely more power than that of elected government.

They have not been slow to use that power to shift the balance of advantage further in favour of the “haves”. Their enthusiasm, for example, to lend for non-productive purposes, such as housing, inflates the value of housing, (and, incidentally, diverts investment from the productive sector), so that there is a massive transfer of wealth to home-owners at the expense of those who can’t afford to buy their own homes.

Globalisation has also played its part. Our ability to defend and promote our own interests – to decide the direction of our own economy -has been steadily eroded by the increasing dominance of the global economy by an ever more concentrated group of super-rich. The freedom of international investors to move capital at will around the globe, and the vast sums at their disposal, have meant that democratic governments have found themselves compelled to comply – for fear of losing investment if they do not – with the wishes of those investors, rather than securing social, environmental or political outcomes that are more congenial to their electorates.

And it is of course a curious aspect of the global economy that it apparently requires top executives to be paid at the highest international level – a level that is constantly being bid up – to ensure, we are told, that we attract the best talent; but, at the same time, it demands that wages – treated as just another production cost – must be held down to match the lowest levels in competing low-wage economies.

And on the subject of our international competitiveness or lack of it, the deep-seated and long-term opposition to ensuring that our exchange rate is at a competitive level and the refusal even to consider the issue (dating back at least to Harold Wilson’s futile battle against devaluation and Denis Healey’s rejection of the IMF’s advice to frame monetary policy in terms of Domestic Credit Expansion), are a further reflection of the power of the wealthy to set the agenda. A lower exchange rate would of course stimulate the economy and create more jobs, and is by far the fairest and most immediately effective and comprehensive means of improving competitiveness in a global economy in which others are becoming constantly more efficient; but it would also reduce the international value of assets held by the wealthy, who have managed to dominate such limited debate as there has been by constantly asserting, in defiance of the evidence, that a lower exchange rate would erode any initial gain in competitiveness by increasing inflation.

As a result, we have placed the whole burden of maintaining or improving competitiveness on wage-earners; we are constantly told that we can’t afford higher wages, and that improvements in competitiveness must come from cutting costs – and essentially labour costs. The preferred instruments have accordingly been measures to reduce the bargaining power of workers, weaken trade unions, make it easier for employers to pay low wages, and make life tougher for the unemployed and other beneficiaries so as to force them back into the labour market to compete for low-paid jobs.

Our unacknowledged problems with competitiveness have meant the sacrifice of manufacturing, where working people are best able to earn a living and whose decline has reduced any prospect of new jobs, innovation and productivity improvements, in favour of a financial services sector which delivers its benefits uniquely to those who have access to capital.

The otherwise incomprehensible insistence that austerity is the correct response to recession is to be explained in the same way. Recession has always been seen as an opportunity to weaken labour, ever since Andrew Mellon, the multimillionaire US treasury secretary, issued the rallying call to employers after the 1929 crash, to “liquidate labour”. The high rates of unemployment engendered by recession have always meant a reduction in the bargaining power of workers – an opportunity to swing the balance of advantage further in favour of employers that has been too good to miss.

Recession has also meant that government spending has become an easy, if irrational, target. The constant impetus to privatisation, already powerful as an element in neo-liberal doctrine, has received a further fillip from the supposed need to “cut the deficit” by slashing government spending. So, the support provided by public services is weakened when the disadvantaged most need it, and the opportunities for profit-making and profit-taking by private commerce are enlarged. Again, the rich emerge from adversity with their advantage over the rest of us enhanced.

Underpinning all of these developments is the article of faith that the “free” or unregulated market can be accurately predicted on the basis of mathematical models and that it is self-correcting and infallible. The acceptance of this doctrine has been a sure-fire recipe for allowing the rich to entrench and intensify their existing advantage. If intervention in the market is to be eschewed, and market outcomes are not to be challenged, the way is clear for those who are already dominant to use their power to grab what they can, all the while proclaiming that no one should complain because that is what the market ordains.

None of this should be a cause for surprise. These elements have been present, if not overt, in the policies pursued for over three decades by successive governments. While attention has focused on the huge incomes and low tax rates organised for themselves by the rich, it may not have been fully recognised how far their gains are the result of policies that have been part of a coordinated and self-reinforcing pattern, that has had as its deliberate aim the reinforcement of the power of the wealthy to dominate our economy and the weakening of the power of workers to protect themselves. The destructive gap between rich and poor has widened, in other words, because the rich have been able to bend governments to their will and have used their power to ensure that it is so.

Last Thursday’s jobless figures – the worst in thirteen years – show that the four years since the global financial crisis plunged the world into recession have seen New Zealand unemployment get worse, not better.

And, as is always the case in a recession, the official figures inevitably understate the numbers of those seeking work. In a more buoyant economy, improved employment prospects would bring many of those currently resigned to being out of work back into the jobs market.

In the wake of the grim news about factory closures and lay-offs over recent months, the figures were only to be expected. Indeed, the warnings about a crisis in manufacturing have been coming thick and fast, and from all quarters.

There was, though, one person, it seems, who was blindsided by the bad news. The Prime Minister, we were told by the television news, was “taken by surprise”. The only explanation for this is that John Key has paid little attention to the unemployment issue over the past four years, despite its destructive impact both on individuals and their families, and on society as a whole.

Over that whole period, I and others have warned consistently that the policies currently being followed would inevitably see unemployment rise. This was entirely consistent with the low priority given by the government to the problem – apart from an ineffectual “Jobs Summit” in the government’s opening months, unemployment has been left to look after itself.

But that neglect has been anything other than benign. The government has deliberately put in place policies to restrict benefits and cut their value, and to slash wages at the bottom end of the scale, so as to force those without work back into a non-existent jobs market.

The object has been to make people compete for the few low-paid jobs available by offering to work for lower and lower wages, so that there is downward pressure on the whole wages structure. There, in a nutshell, is the government’s strategy for dealing with unemployment – don’t bother about creating more jobs by getting the economy moving again, but force down wages in the hope that people will price themselves back into work.

Even if this strategy were to work in its own limited terms, lower wages would mean less purchasing power and lower demand. How would this help to get the economy moving?

The government has reinforced its strategy by cutting public spending and throwing public servants out of work, so that they add to the competition for the dwindling number of jobs. This leaves the obvious question – where is the increased demand needed to create more jobs to come from if the government, instead of stimulating economic activity, makes its own contribution to closing the economy down?

Are they unaware that the IMF, taking fright at last at what austerity is doing in Europe, has published a new assessment of the powerful multiplier effect of cuts in government spending on the level of economic activity? Even the government’s supposed central goal – eliminating its deficit by 2014/15 – is made much more difficult if high unemployment and a flat economy generate an equally flat tax revenue.

What is really depressing, however, about our current plight is that even if by some miracle the economy were to get moving again, we would have done nothing to re-balance the economy towards saving, investment and exports and away from consumption and imports.

We are about to start another familiar and vicious circle – an overheated Auckland domestic property market, fuelled by unrestrained lending by banks whose sole concern is easy profits, leading to higher interest rates, producing an overvalued exchange rate that prices our production out of international markets and cuts our margins, so that we are forced to borrow more from overseas and sell our remaining assets to foreign owners. Little wonder that those fortunate enough to have money to spare see domestic housing as the only sensible investment and making and selling things into international markets as a game for mugs.

The chances of breaking out of this destructive cycle seem slimmer than ever. The new Governor of the Reserve Bank has wasted no time in abjuring the hints of greater flexibility issued by his predecessor and instead nailing his colours to the mast of an orthodoxy that has now been doing its destructive worst for three decades. We see not a scintilla of new thinking from either the government or the Reserve Bank; surprisingly the only hint of the need for a new approach now comes from the Treasury.

Planet Key is apparently a sunlit place of leisure and fun. The real world, at least the part of it for which John Key has some responsibility, is a much harsher place. The plight of the unemployed makes us all poorer. Without changes in policy, we face the grim prospect of national decline, despite the advantages we enjoy of political stability, an educated workforce, a supportive context in which to do business, and access to growing markets for the premium products we are uniquely expert at producing. Sadly, that is all outweighed by the mistakes that our leaders are determined to go on making.

The latest figures showing higher unemployment may have dashed hopes that, in our fifth year of recession-induced stagnation, we have at last begun to recover, but we are still being offered the same old excuses. The problems arise, we are told, because of factors beyond our control – the Christchurch earthquake and the euro-zone crisis.

No one would argue that these factors have been helpful; but the real reasons for continuing high unemployment are very much within our control. People are out of work because that is what free-market theory dictates.

The theory takes a very simple view of how markets work. If the supply of a particular commodity exceeds the demand, the price will fall. So far so good; that is generally true of commodities, like sugar or coffee. Where the free-market ideologues part company with common sense, however, is in insisting that labour is just such a commodity.

Unemployment happens, they say, because the supply of labour exceeds demand. This should mean that the price of labour will fall – in other words, wages should come down. The government takes the view that the remedy is therefore in the hands of the unemployed themselves; they can correct the situation by accepting lower wages.

There are several points to make about this. First, bringing wages down is seriously at odds with the government’s declared goal of closing the gap, in incomes and living standards, with Australia. It is a little odd that closing the gap requires us to accept lower incomes.

Secondly, the theorists are looking at only one side of the equation; by concentrating only on the supposed excess supply of labour, they take a completely static view of the demand for labour and of how a market economy really works.

That demand could easily be raised. A more buoyant economy would mean that employers were keen to take on more people, but that could only happen with a change in policy – and that is negated by the government’s insistence that, as the theory requires, wages must be cut. If the government’s priority is to cut incomes and therefore spending, there is no hope of increasing demand in general and demand for labour in particular.

The government, though, continues to pin its hopes on forcing down the price of labour, as though it were just another commodity. They refuse to recognise that labour is not merely a commodity, but is really another way of describing people’s working lives and their standards of life – that it determines the cohesion of families, the life chances of children, the strength of our society.

In any case, after four years, we can say with some confidence that the policy has failed. Unemployment remains stubbornly high. The economy has stalled. But the government is not deterred. Ministers dare not say so publicly, but they use economists’ jargon to explain why unemployment remains high. Labour costs are “sticky” – that is, they have not fallen in order to clear the market, as the theory says should happen. Their conclusion is, therefore, that the market must be helped by “unsticking” labour costs to force them down.

This explains so much of government policy. It is why workers’ rights at work have been weakened. It is why benefits are removed so that even solo mums with young children are forced back into the labour market, whether or not there are jobs. It is why the level of benefits is being cut and the minimum wage is held down while top salaries zoom upwards. It is why the government lends covert support to big overseas employers like Oceania or Talleys as they cut the real wages paid to already low-paid employees. It is why the government seems so relaxed about unemployment.

The government has worked hard to put a euphemistic gloss on this policy. When the Prime Minister recently listed ten priorities in public policy, the first goal identified was to “reduce welfare dependency”. Few of those who no doubt nodded in support of such a policy would have stopped to understand that this is merely part of an overall strategy to force down wages.

And the sad truth is that, even if the strategy succeeded in its immediate goal, it would still be bad news. Lower wages would just mean less purchasing power, and that would mean a more sluggish economy, tougher times for retailing, less money for investment – and it would mean the jobs market chasing its own tail downwards.

If we are really concerned, as we should be, at our lack of competitiveness in international terms, there is a much more obvious, more effective and fairer way of dealing with it than heaping the burden on to the poorest in our society. A lower exchange rate would immediately cut costs across the board and ensure that everyone made a proper contribution to becoming competitive.

But the theory doesn’t allow that. The exchange rate must be manipulated as a counter-inflation tool, whatever the impact on competitiveness. Isn’t it time that we kicked a theory that serves us so poorly into touch?

KiwiRail’s problems with their Chinese-built rolling stock have provoked a predictable reaction, and not just from workers at the Hillside engineering works in Dunedin. That reaction will have intensified at the news that hardwood sleepers imported from Peru now constitute a safety risk.

It is understandable that many will see this as poetic justice. But, as KiwiRail’s management have argued, “these things happen”; and these problems may have passed without comment but for the fact that Kiwi jobs were lost in the process.

Yet, even if the Chinese-built rolling stock had performed well, the case would still have raised some important issues. When does it make sense to import, even if Kiwi jobs are lost as a consequence, and when does it not?

The conventional wisdom is that if it is possible to source goods more cheaply from overseas, then it makes sense to do so. Otherwise, the argument goes, efficiency and competitiveness will be jeopardised by costs that are higher than they need be and the domestic firm’s viability will be jeopardised.

Some would go further. For them, to deny the market’s judgment would be sacrilege. It is not only right for individual firms to buy from the cheapest supplier, they would argue; it is also in the best interests of the economy as a whole.

According to this view, there is no point in trying to maintain a domestic capability if the same product can be made better or more cheaply elsewhere. Better to accept that there are some areas where we can’t compete, and to move our labour and capital to industries where we can develop and exploit a competitive advantage.

In that way, it is said, we concentrate on what we are best at, and the law of comparative advantage will then – provided that our exchange rate is correctly aligned – give us an edge, and allow us to move resources to areas where we can out-perform our rivals. Workers might be inconvenienced by having to change jobs, but they will gain better-paid and more secure employment, in the long run, in industries where we are more likely to be competitive.

There is a good deal to be said for this approach. The whole focus on free trade under successive governments, after all, has proceeded on the basis that it is worth sacrificing production and jobs in a range of industries – clothing, footwear and carpets are examples – in return for expanded opportunities in overseas markets for those products that we are good at producing.

Unfortunately, the comforting theory about perfect competition doesn’t always work out in practice. There are often a number of awkward factors that distort what is expected to be a proper balance of gain and loss.

The goods we import instead of making ourselves might, for example, have a higher value than those we concentrate on exporting. That seems to be the case with China; while we congratulate ourselves on increasing our primary product exports to China, we try not to notice the much greater increase in the value of our manufactured imports from that country. And we have to pay for those imports across the foreign exchanges, imposing a further burden on our balance of payments – a burden we already struggle to manage.

Furthermore, whatever the market says, we may be prepared to pay a premium for goods made in New Zealand on the ground that they are more likely to meet our particular conditions and requirements, and to offer better after-sales service, than would cheaper imports. And we may have strategic reasons for wanting to maintain some manufacturing capability in areas that the market tells us are difficult for us; we may not wish, in other words, to become totally dependent on overseas suppliers for goods that we can’t do without.

Most importantly, if we are to take this absolutist view that the market is always right, we need to be very sure that our own domestic policy settings are correctly positioned to allow us to make the strategy work.

We would need, first, to ensure that our exchange rate is correctly aligned so that we get the best advantage from exporting the goods we are best at producing. But we fail abysmally in this respect; because we use the exchange rate to restrain inflation, we don’t allow it to perform its proper function – and, as a result, we ensure that even our best exporters get a lower return than they should while importers are given a head-start advantage over our own production.

And if we are serious about sacrificing jobs so that workers move to more productive jobs elsewhere, we’d better make sure that those jobs really exist. Again, we don’t even get close. With high unemployment already, the government’s emphasis on cuts and its tolerance of an overvalued dollar ensure that workers whose jobs are destroyed by imports have nowhere else to go.

If we are blithely going to trade jobs for cheap imports, we should surely make certain that the theory is not contradicted by what we actually do?

Two issues – the turmoil on world stock markets, and the riots in English cities – have dominated news bulletins over recent days. Each is a significant news story in its own right, but the interesting question is whether they are in any way linked.

What looks suspiciously like the global financial crisis, Part II, is widely reported as a problem of government debt. Those many governments that have identified debt reduction as their top priority have seen the renewed crisis as vindicating their analysis. In reality, however, what it demonstrates is that they have got it completely wrong.

No one doubts that government debt in the US, the UK and the eurozone is higher than it should be and is a drag on economic recovery. Debt arises, however, because spending has outpaced revenue. As a matter of logic, therefore, there are two (and not necessarily mutually exclusive) ways of remedying the situation.

Governments can choose to focus on cutting spending, or they can try to increase revenue. These further economic shocks show that, in focusing exclusively on cutting spending, they have made the wrong choice.

The problem is that the level of debt is a function of the level of economic activity; the higher the level of economic activity, the more buoyant the government’s tax revenue. A government that has trouble in balancing its books in a recession, and that seeks to deal with that issue exclusively by cutting its spending, necessarily reduces the level of economic activity and – by depressing its tax revenue – makes the debt problem more difficult to resolve.

Sadly, we have seen, in the economies that have spawned the current crisis, extreme examples of this error. In the US, the Republican majority in the House of Representatives has been wagged by the Tea Party tail, with the result that the usually technical issue of raising the government’s debt ceiling became an issue of moral probity.

The Republicans not only resisted any increase in the government’s ability to borrow but refused to countenance any reversal of the tax concessions that George W. Bush made to the super-rich. A refusal to allow any tax increase, and an insistence on massive spending cuts in the short term – while the economy is still in recession – have rightly been seen by the credit rating agencies as a cause for concern.

In Europe, the problems are more structural. The eurozone lured into its membership smaller and weaker economies – and some not so small – that could not hope to live with monetary conditions established to suit the interests of the dominant German economy. Those countries were lulled into a false sense of security when money and credit were plentiful; but – come the recession – they are now denied the usual remedy of devaluing their currencies. The only course open to them is savage cuts and austerity.

The problem with austerity as a supposed remedy is that closing economies down in an effort to cut spending means that they cannot hope to repay the massive further borrowing they need just to keep their heads above water. Little wonder that European banks look nervously at the probably worthless securities they hold from deficit countries, that bank failures are now seen as a grim possibility, and that contagion threatens to spread not only throughout the eurozone but across the global economy.

The problem is less stark in the UK, which sensibly stayed out of the eurozone. In the British case, however, the damage is self-inflicted. The coalition government, elected last year, has insisted that giving priority to savage cuts in spending will give confidence to the money markets, a view thoroughly discredited by the US and eurozone experience, and – as the “confidence fairy” fails to materialise – by the increasingly obvious failure of the British economy to recover from recession.

The only fairy that has made its presence felt has been a very wicked one indeed. The recession – and, in particular, rising levels of poverty, high levels of youth unemployment, severe reductions in post-compulsory educational opportunities, and sharp increases in public sector rents – has certainly played its part in creating the conditions for last week’s shameful riots.

Each of the many thousands of individual acts of criminality should of course be condemned and punished. But it is pointless and wrong to ignore the fact that riots on this scale are a social phenomenon. Many of us will have been bewildered by the absence – in the television pictures broadcast around the world – of any decent impulse, any sense of social responsibility.

But the young people who behaved like a feral rat pack feel that they owe very little to a society that has banished them to its extreme margins and that treats them as worthless. This is not a question of making excuses, but an attempt to find an explanation for what is otherwise inexplicable to most people.

And before we bless our own good fortune in New Zealand, let us recognise that many of these conditions apply here as well. We have a government that talks of nothing but deficit reduction while the developed world’s worst youth unemployment is allowed to fester. Like misguided governments overseas, given the choice between austerity and jobs, we have made the wrong choice.